The Markets in Financial Instruments Directive (MiFID II) – arguably the largest piece of regulatory change in investment markets since 2007 – comes into force in under a year. Here's what you need to know now to meet the January 2018 deadline.
The final countdown to the Markets in Financial Instruments Directive (MiFID II) implementation has begun with less than 12 months to go. The original deadline for implementation was January 2017, but thanks to the delay announced last year the market has been given a little more breathing space.
MiFID II summary
MiFID II is arguably the largest piece of regulatory change to be introduced for investment markets since its predecessor first came in to force in 2007. For many firms it will be a race against the clock to complete their implementation projects in time.
Even for those who are the most well prepared, the scale of the data and IT challenges cannot be underestimated. Those who have not yet started their preparations in earnest face the risk of identifying a critical factor late or simply not being able to complete their implementation program in time.
Uncertainties in market structures and market data
For all firms there are still many uncertainties, particularly in relation to market structures and the availability of market data.
The classification of firms as Systematic Internalisers (SIs), for example, will rely on data which is not yet available. It is also not clear exactly how MiFID II will impact the way market counterparties interact with each other in practice – MiFID II introduces an entirely new category of trading venue, the Organised Trading Facility (OTF). Yet, despite this uncertainty, firms must progress their implementation plans or risk failing to meet the January 2018 deadline.
The good news is that the vast majority of rules are clear and now defined in sufficient detail for firms to act on them with confidence. This is especially so for those relating to governance and investor protection. Pulling all of the rules and guidance together can be challenging though.
One of the key challenges for many firms has been the increasing role of the European regulatory bodies, such as the European Securities and Markets Authority (ESMA). Many firms have traditionally relied on the Financial Conduct Authority (FCA) and previously Financial Services Authority (FSA) as their primary source of information about regulatory change and regulatory standards. But in the case of MiFID II there are multiple sources for information, eg ESMA, the European Commission, national regulators and HM Treasury.
The FCA will not be consolidating all of this material in one place. The FCA will also be offering very limited, if any, guidance on elements of MiFID II that form part of the regulation. Topics such as transaction reporting are now within ESMA's remit to provide guidance and the FCA has been clear that it will not be updating its Transaction Reporting User Guide (TRUP) going forward.
What you need to do now to meet the deadline
If you haven't already done so, now is the time to really look behind the headlines and start examining the detail of the new rules. The package is complex – made up of the Level 1 text, delegated acts, technical standards and the FCA's consultation papers which set out their implementation plans.
But piecing all of this together is critical to understanding the full scope of MiFID II and firms cannot hope to be compliant by January 2018 if they do not do this.
What firms should be doing now:
- Start your detailed gap analysis, if you haven't done so
- Get to grips with the detailed requirements set out in the delegated acts, RTS, ESMA guidance and FCA consultation papers
- Understand your data and system requirements so that you can plan for any new builds or system upgrades required
- Identify the strategic decisions for your business, for example around pricing of investment research whether you (or your key counterparties) may become an OTF or SI
For more information, or advice around preparing for MiFID II please contact Paul Garbutt.